The end of cheap airfares in Australia?

4 Feb 2013, 12:02 p.m.

The Australian Competition and Consumer Commission is about to bring down the most important regulatory decision in the history of long-distance travel in this country, with the future of cheap airfares on the line.

The end of cheap airfares in Australia?

The ACCC's decision on the Virgin Australia-Tiger Airways deal will determine the future of cheap airfares in Australia.

The Australian Competition and Consumer Commission is about to bring down the most important regulatory decision in the history of long-distance travel in this country, with the future of cheap airfares on the line.

Because Australia is such a high-cost country, it’s becoming increasingly difficult for airlines to offer cheap-as-chips airfares, but undoubtedly the biggest factor is the small size of the available domestic market.

Spread out around the edges of a continental desert roughly the same size as China are just 22 million people, admittedly with great purchasing power.

Australia has a taste for low-cost travel nurtured over the past 22 years since the first Compass arrived on the scene in 1990. But in that time this intensely competitive end of the business has eaten the lunch of a small army of dreamers who have tried to crunch the numbers that accountants love with the low fares that appeal to the consumers.

Now ACCC chairman Rod Sims is making noises about knocking back a plan by Virgin Australia to take control of its competitor Tiger Airways.

Virgin wants Tiger to take over its fight for a share of the leisure market in the same way as Jetstar fights that battle for Qantas, so that Virgin can concentrate on its development as a business airline.

But there has been speculation that, in his decision anticipated this Thursday, Rod Sims will either knock back the Virgin-Tiger deal outright or demand concessions by Virgin to lessen the reduction in competition he thinks the Tiger takeover will cause.

That in turn may cause Virgin and Tiger’s biggest shareholder, Singapore Airlines, to simply pull the pin on Tiger’s Australian operations, which have never made a profit.

If it occurs like that, the irony is almost satirical: the competition watchdog precipitates a calamitous reduction in competition, an immediate sharp spike in airfares and a commensurate reduction in the number of people travelling around the country.

The question is: how badly does Virgin want to continue to lose money to retain a strategic competitor to Jetstar in the discount fares market?

That’s not to say that Tiger Airways is a basket case and can’t in future make money. As a self-styled ultra-low-cost airline, it has achieved the lowest unit costs ever posted in the Australia domestic flying business.

Though it’s hard to calculate its recent performance because of the disruption since its 2011 grounding, Tiger was achieving unit costs in Australia of around 4.5 cents per available seat kilometre (ASK) before that and will do even better if it continues to grow and achieve even greater efficiencies.

Though it is increasingly difficult to determine Jetstar’s performance in Qantas’s figures, its comparable cost is nearly twice Tiger’s or around 8 cents per ASK.

While Tiger can break even on fares between Melbourne and Sydney of less than $50, Jetstar’s break even is nearer $80.

Tiger can break even charging as little as $100 one way between Melbourne and Perth, although it hasn’t been immune from the trans-Nullabor business class war between Qantas and Virgin and recently cut back services to Perth, putting the capacity it saved into new flights to Mackay from Melbourne and Sydney and year-round access to Cairns from Melbourne.

At one stage after it started flying Australian domestic routes in 2007, Tiger Australia got within $500,000 of make a full-year profit, but in the December quarter last year it lost $10 million - or more than $100,000 a day. Its accumulated Australian losses are now $216 million, roughly the same annualised losses as the red ink that is still flowing.

Nearly two years ago, I reported industry analysts had calculated that discount airfares would rise by up to 15 per cent if Tiger disappeared from the Australian scene. Certainly that was the case after Tiger’s July 2011 grounding.

Australia is returning to a duopoly one way or the other, but with four brands in two groups instead of just two. The real risk is that four brands become three, in which case so-called “loss-leading” fares may simply disappear from the market.